Aug 01

Making extra money – do I have to pay extra tax?

We at MoneyMagpie are all for encouraging you to go out there and make as much extra money as you can through any means possible (well… almost!). But on the whole, with extra income comes extra tax implications and it can be really tricky to work out for yourself whether or not you should be paying tax on your money-making schemes.

This guide is designed to give you an idea of when tax will start applying to any extra money you make. However, it can’t cover every individual circumstance. If you’re in any doubt, get personal advice from your local tax office. It’s always better to do this as soon as you think you need advice, rather than risk a load of worry and a hefty bill and/or fine later.


The basics

Tax planning written on a notepad

  • Everyone can earn a certain amount per year tax-free, but if you exceed this amount, you need to let the tax office (HMRC) know.
  • You need to register any new business within three months with HMRC, or you may be fined.
  • If in any doubt, consult your local tax office – they’ll be able to advise you fully.



Calculator working out tax allowances

The first step is to work out whether your earnings (from any regular work combined with extra money making) exceed your personal income allowance. For the 2018-19 tax year, everyone has the right to make up to £11,850 without paying taxes. So, if your only income is from eBay selling, babysitting or something similar, and all the money you make doesn’t add up to more than this allowance, you don’t need to pay tax.

However, this allowance is already taken into account if you work part-time or full-time and you’re paying tax using the PAYE scheme (when money is automatically deducted from your pay packet). So, unless your salary is under £11,850 a year, this means that you’ve already used up your personal allowance and therefore you should be paying tax on any extra money you make on top of your salary.

Personal allowances can vary depending on age, marital status and whether you have any disabilities so be sure to check out exactly what you’re entitled to here.

It’s important to remember that income from a pension is also taxable. So, if you’re a pensioner, you must take into account your annual pension and whether or not it exceeds your personal allowance. If it does, you should be paying extra tax on all other earnings. However, if the total of your pension and your extra earnings is less than your allowance, you’re tax free.


Using eBay

Mobile with ebay app i jean pocket

All that seems very clear and simple, but then it gets a bit trickier. For example a lot of people make money selling things on eBay. For those who do sell on eBay or other listings sites to make extra money, it can be difficult to distinguish between using the site to earn an income and using it merely to get rid of some junk. As Jane Moore from the Institute of Chartered Accountants in England and Wales (ICAEW) puts it: “Cash in the attic is not taxable, but the Revenue will know the difference between a clear-out and a small business.”

So if you’re selling unwanted items every now and then, in theory you’re liable to be taxed on any profits, but usually small earnings will be ignored.

However, if you start to buy products to then sell on, or are regularly selling large amounts of your possessions then the rules change. Again, if your profits using listing sites or classified adverts, plus any other income/salary, do not exceed the £10,600 personal allowance in one year, you do not have to pay tax. But, if you make profits that exceed your personal allowance, or are an income on top of any salary or any other money making, you should be declaring them as they’re taxable.

Regularly buying items to sell on at a profit on eBay or other sites is in effect a small business, and so it’s very important to keep a tab on profits and maintain clear records, including receipts of all your expenses which can be put against your profits for tax purposes. This way, HM Revenue and Customs will be able to accurately calculate how much tax you owe and you won’t end up paying too much. But if you do find yourself going from selling a few things here and there to developing a small business, then you must let HMRC know within three months. Otherwise you’re liable for a £100 fine.

If you’re making a tidy sum which exceeds your personal allowance, but you don’t think it qualifies as a small business, you still need to declare your profits as a new source of income within six months of the end of the financial year.  This gives HMRC time to send you a return, which you will have to complete in order to be taxed the correct amount. For details of how to declare a small business or new sources of income, check out the HMRC website.


Selling your skills

Craftsman using laptop
In the same way as selling your wares can gradually become a small business, so can maximising the money you can make from your personal skills. For example, if you’re a keen gardener and occasionally offer to help out friends and neighbours with their landscape design for a small fee, then any earnings are, in theory, taxable. However, these are usually ignored on the basis that they fall within your personal allowance.

However, when you start helping people on a regular basis whilst amassing a good profit, your hobby has really developed into a small business and any profits that exceed your personal allowance are taxable. As before, when a hobby becomes a business, you must declare it to the taxman within three months.


Capital gains

Capital gains tax is only going to be relevant for you if you’re selling any belongings that have increased in value whilst in your ownership, such as a piece of art or an antique.

The first thing to know is that capital gains tax doesn’t apply to personal items worth less than £6,000, so if you’re selling it for less then it’s not taxable.

Secondly, there’s a separate annual personal allowance for CGT which is currently £11,700. This means that if you sell items like jewellery or shares that are worth over £6,000, you’re allowed to make up to £11,700 in profits (i.e. the difference between the price you paid for the item when you bought it and the price it was bought for from you), before CGT applies to you.

Items to watch out for are second homes (CGT does not apply to principal dwellings i.e. your own home), expensive artworks, fine jewellery, stocks & shares and land.

It doesn’t matter where or how you sell items that are taxable under capital gains – whether it’s eBay or Christie’s you should pay it. Click here for more on Capital Gains Tax.



Room for rent sign
The exception to the personal allowance rule is renting. Renting space, your house or your drive is always taxable, regardless of personal allowance. Saying this, a rental relief exemption does exist allowing you to make up to £7,500 annually from renting a room in the house in which you live.

However, if you want to rent your whole house, you have to pay tax on your profits and the same goes for renting your driveway. Often arrangements for renting a room or a driveway are made on a cash-in-hand basis. However, technically, you still should be declaring these earnings and paying tax on them. Don’t be fooled, HMRC is aware of big public events such as Wimbledon, so if you live next door to the All England Club and happen to deposit a large amount of cash shortly after the tournament, they’ll be on to you.


Small extra earners

Woman completing Online Survey
If you don’t earn a salary and you have been making a bit of extra cash on the side by using cashback sites, online surveys and doing a spot of mystery shopping here and there, you’re probably not exceeding your personal allowance and so you don’t need to pay tax.

However, some of the larger companies that organise mystery shopping and online surveys will automatically take your tax and national insurance contributions out of your pay for you. This is great if you already earn a salary, as it means you don’t have to worry about your tax return, but if you aren’t exceeding your personal allowance, it’s money that you don’t need to pay. Fret not, you can get this money back in a jiffy by filling out this R40 form and sending it in, or by writing a letter to HMRC informing them of what’s happened (although this will probably take longer to process).


Extra earnings and PAYE

Business woman working in office
If you usually pay your taxes using the PAYE system and would prefer not to think about all this extra tax stuff that’s indeed mightily complicated, there’s something you can do to make it all go away. By changing your PAYE code with HMRC, your extra earnings can be taken into account when you’re taxed on your salary and so you won’t have to pay anything extra or fill out a return.

In order to change your PAYE code, you have to work out how much extra you’re earning and then contact HMRC who will help you sort it out. Although it sounds great, this solution is really only effective for the minority of cases for two reasons:

  • Firstly, your extra earnings can’t add up to more than £2,500, after which you really have to fill out a separate tax return.
  • Secondly, your extra earnings need to be quite stable so that you can pinpoint exactly how much you expect to earn in one tax year. If you’re renting a property at a set rate per month/annum, this is pretty easy. However, if you’re earning bits of cash here and there it becomes much more difficult to predict and you’ll end up either over or underpaying, which just leads to more form filling. Using your PAYE code to cover extra earnings also means that you pay your tax sooner as it comes out monthly, whereas your extra earnings could be sporadic – leaving you in the red some months.



Ltd. Company registration forms graphic

If you have turned your small business into a nice profit maker and you are now making profits in excess of your personal allowance, it may be worth considering incorporating the business into a limited company.

Although incorporation has more regulations as you will have to file the accounts each year at both companies house and HMRC, it has some significant benefits, such as:

  • It offers the people running it more protection than a self-employed business
  • It allows you to protect the company name by registering it at Companies House
  • It can be more tax efficient.

 Nordens have developed a free to download app where you can see if incorporation is beneficial based on differing profit levels which you can get here.

Ways to make more money

Young man holding handfuls of pound notes

If you’re looking for inspiration on how to make more money, make sure you check out MoneyMagpie’s ways to make money section. We’ve got loads of ideas on how to bump up your bank balance!


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90 thoughts on Making extra money – do I have to pay extra tax?

  1. I don’t work but my husband does we have 3 small children and me and a friend are thinking of starting a cleaning company how much would we have to earn before tax

  2. Great readJasmine, always looking for ways to make some extra cash. I just wanted to share something I’ve been doing recently. I run an office and have noticed that unused toner was piling up in storage. Looked into returning but that was no good. Tried out the site tonerconnect and was impressed. They had quick service and that payout was nice.

  3. Thanks very much for getting back to me, she has done just that and has started off the process

    Thanks for your help and info

  4. Hello,

    My partner sings in a band usually once a month where she receives £35 for a performance and so over the year takes home £420, she does it more as a hobby then to make money off it. She is currently on a salary for her job and so is paying tax on this as normal. She had read on the HRMC website previously that if she didnt earn over £2,500 on her extra income she didnt need to fill out a self assessment form. She now realises she should have been paying tax on this however is concerned at the penalites she will be paying. She needs to go back the last 4 years – can you advise on what charges she will be paying as the website gives different numbers and we are unsure on what the correct amount is

    1. Hi there Rus. I’ve asked Patrick in the HMRC press office about this and here is his reply: “Your reader needs to phone the income tax helpline and we should be able to code out any tax due.

      The sooner she gives us a call, the less likely we are to consider charging a penalty.

      Coming forward off her own back is going to make us see her non declaration in a benevolent light.

      The number to call is 0300 200 3300”

      Hope that helps!

  5. I am currently employed with a annual salary of 38k and pay PAYE tax. I do occasionally also medical translations and reviews on my free time for a translation agency abroad. However, this is a very casual activity with very little fluctuating earnings. I am just about to get paid £500 for the projects I worked for the last year. I’m not keen into turning myself into a professional freelance translator though, as I started doing this for extra pocket money. Would I need to start a self-assessment form with the HMRC?

    1. Hi there Eleni,

      I have checked with HMRC (I didn’t mention your name – just said you were ‘a reader’). This is what they said:

      “Good evening Jasmine, thanks for your query below, your reader needs to contact the Income Tax helpline The number is 0300 200 3300 . The Helpline will make a decision about what to do.

      Highly unlikely we would ask someone to submit a return, we would just code out any tax due through the PAYE system.

      This explains who need to submit a tax return.

      So let’s say your reader owed £240.00 on his untaxed non PAYE income, we would collect the tax due through a PAYE coding adjustment, meaning he would pay £20 per month for 12 months via his employment. There would no need to submit a tax return.”

      Hope that helps!

  6. Does anyone know if you can claim business losses back against your main income? So if I bought some stock that didn’t sell, would I be able to claim this back in tax against my employer based income? Also do you know if its worth having an accountant for a £7000 a year turnover business?

    1. Hi Will

      I’m not quite sure what you mean by ’employer based income’, but I’ve checked with accountants Oscar Ip and Co in Liverpool and they say that if you’re running a sole trader business while employed the trading losses can be offset against the PAYE. As long as you are genuinely in business with a view to earn profit then the losses can offset any current year income, or be put against past or future profits of the trade itself.

      Getting professional advice from an accountant may help you on taxation issues as well as business start-up guidance. You can also receive general advice on filling self assessment returns etc by contact HMRC.

      Do take a look at the small business section of HMRC for extra help as well

  7. I currently work full time as a IT Technician in a school and have been thinking about offering my IT services locally. I earn £24k a year and pay PAYE tax. I have no idea how much custom I will get and therefore have no idea how much extra income to expect. Do I have to notify the tax man? What happens if I do and I don’t end up earning a lot of money from it?

  8. hi i am looking a selling 500pcs of a item for christmas. i won’t be selling anything else after and this is only thing i will sell. as i am selling it on ebay do i need to register as self employed or not as i am confused on how to approach this.


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